How to Properly Claim Capital Losses on Your Tax Return

As an investor, you can use capital losses to offset capital gains and up to $3,000 of ordinary income on your tax return. Any remaining capital loss can be carried over to the next tax year. However, a recent decision by the Tax Court has clarified how to apply these rules correctly.

When it comes to federal income taxes, gains and losses from dispositions of capital assets (such as stocks, bonds, and other securities) are “netted” at tax return time. This means that your capital gains and losses can effectively cancel each other out. If you have an excess capital loss, it can be used to offset up to $3,000 of ordinary income. Any remainder is carried over to the next year.

On the other hand, if you show a net long-term gain (i.e., for sales of capital assets that you’ve held for more than one year), you’ll pay tax at a rate of no higher than 20% or 15% for most taxpayers. Investors can save taxes by harvesting capital losses to offset high-taxed net short-term capital gains, which are taxed at ordinary income rates up to 37%.

The recent Tax Court decision involved a couple who claimed a long-term capital loss of nearly $124,000 on their 2017 tax return. As a result of this loss, they reported -$1,000 of adjusted